Financial Analysis of Emaar Properties PSJC - Case Study Example

Emaar Properties PSJC

Executive summary

Financial analysis is the process of examining an organization's monetary statements to give a forthcoming record into the present condition of the business, with respect to stock turnover and the capacity to meet short and long-term obligations (Andrew & Gallagher, 2007). Financial examination dissects the Proficiency, profitability, liquidity, and capital structure of a firm (Andrew & Gallagher, 2007). This paper is going to analyze the 2014 and 2015 financial statements of a UAE company called Emmar Properties PSIC and its subsidiaries. More so, it will analyze these statements by looking at the most significant ratios and then provide interpretation of the results.

Acknowledgements

I would like to give my special gratitude to my teacher (Name) for giving me this special chance to conduct this research paper on financial analysis of Emmar Properties PSIC it has greatly opened up my mind to the world of business. I would also like thank the management and employees of Emaar Properties PSCJ for their cooperation. Finally, I would like to thank the auditors at Ernst and Young, who prepared and audited the financial statements of Emaar Properties PSCJ.

• Introduction

The best way to know how a company is performing in the market is to conduct a financial analysis on its financial statements. This will give one a clear understanding of that particular firm. This paper is going to conduct a financial analysis on a company based in the UAE called Emaar Properties PSJC and its subsidiaries. The company specializes in the property business, and it is significantly involved in the construction of malls, hypermarkets, and other development projects. The paper will use various financial ratios to analyze the company financial performance. The financial ratios include

• liquidity ratios
• Profitability ratio-gross and net profit margins, net assets turnover, operating profit ratio, operating expense ratio, return on investment, and equity.
• Leverage ratios - debt, and debt-equity ratios.
• Debt management ratios-debt to equity ratio

2.0. Financial analysis

2.1 Liquidity ratios

The liquidity ratio comprises of the current ratio and the acid-test ratio (Hachmeister, 2007).

2.1.1 Current ratio

= current assets ÷ current liabilities

Year

2014 AED ‘000

2015 ADE ‘000

Current assets

74,179,256

79,556,794

Current liabilities

38,548,682

37,635,662

Current ratio

1.924

2.114

Both the two currents ratios are greater than one this means that Emaar properties can its short-term obligations with its current assets. The company is also in a sound financial situation in 2015 as compared to 2014 (O’Sullivan, 2016).

2.1.2 Acid test ratio

Acid test ratio= (current assets-inventory) ÷ current liabilities

Year

2014 AED ‘000

2015ADE ‘000

Current assets

74,179,256

79,556,794

Less inventory

(1,126,558)

(2,616,981)

Current liabilities

38,548,682

37,635,662

Acid test ratio

1.895

2.044

Emaar had an acid test ratio that is greater than one for the two years, and this indicates that the company can meet its short-term obligations (O’Sullivan, 2015).

2.2 Profitability Ratios

2.2.1 Gross profit margin

Gross profit margin=gross profit ÷ revenue ×100

Year

2014 AED ‘000

2015 AED ‘000

Gross profit

5,940,728

7,262,924

Revenue

9,930,044

13,660,536

Gross profit margin

59.826%

53.176%

These results show that the gross profit margin for 2014 was higher that the gross profit margin of 2015. This means that for 2014 Emaar properties made more profits than the year 2015 (O’Sullivan, 2016). The high GPM also means that Emaar can still continue to make more profits as long as they keep their overhead cost in control.

2.2.2 Net profit margin

Net profit margin= net profit ÷ revenue × 100

Year

2014 AED ‘000

2015 AED ‘000

Net profit

3,686,430

4,589,293

Revenue

9,930,044

13,660,536

Gross profit margin

37.124%

33.595%

The results for 2014 show that Emaar properties had a gross profit margin of 37.124% that shows that the company was profitable that year. In 2015, Emaar had a gross profit margin of 33.595% that is still high though 3.529% less than in 2014. This means they made less profit than the previous year (O’Sullivan, 2015).

2.2.3 Net assets turnover

Year

2014

AED’ 000

2015

ADE ‘000

Total assets

74,179,256

79,556,794

Current liabilities

(38,548,682)

(37,635,662)

Capital employed

35,630,574

41921132

Net assets turnover= sales ÷capital employed

Year

2014

AED ’ 000

2015

AED ‘000

Revenue

9,930,044

13,660,536

Capital employed

35,630,574

41,921,132

Net assets turnover

0.279

0.326

These results show that Emaar had a high asset turnover in 2015 than in 2014 that means the company’s assets generated more revenue in 2015 than in 2014 (O’Sullivan, 2016).

2.2.4 Operating profit ratio

Operating profit ratio = profit before interest and tax ÷ revenue × 100

Year

2014

AED ’ 000

2015

AED ‘000

Profit before interest and tax

3,694,190

4,535,343

Revenue

9,930,044

13,660,536

Operating profit ratio

37.202%

33.200%

The operation ratio for 2014 and 2015 are 37.202% and 33.2% respectively. This means that the company earned 37.2% and 33.3% in operating profit in year 2014 and 2015 for each unit sold (O’Sullivan, 2015).

2.2.5 Operating expense ratio

Operating expense ratio = operating expense ÷ revenue × 100

Year

2014

AED ’ 000

2015

AED ‘000

Operating expense

170,787

160,560

Revenue

9,930,044

13,660,536

Operating expense ratio

1.720%

1.175%

The calculation show that the cost of operating Emaar properties assets in 2014 was 0.6 higher than in 2015. Therefore, Emaar incurred a higher operating expense for each unit sold in 2015 than in the previous year (O’Sullivan, 2016).

2.2.6 Return on investment

Return on investment = profit after tax ÷ capital employed × 100

Year

2014

AED ’ 000

2015

AED ‘000

Net profit after tax

3,686,430

4,589,293

Capital employed

35,630,574

41,921,132

Return on investment

10.346%

10.947%

The return on investment ratio is the profit earned by the company for every unit of capital employed (Andrew & Gallagher, 2007). In Emaar case, the return on investment in the year 2014 was 10.346% and 10.947% in 2015. This means that within those two years it managed to earn over 10% from its investments (O’Sullivan, 2015).

2.2.7 Return on equity

Earning attributed to equity shareholders ÷ equity × 100

Year

2014

AED ’ 000

2015

AED ‘000

Earnings attributed to equity

9,445,391

14,018,215

Equity

35,630,574

41,921,132

Return on equity

26.509%

33.439%

Emaar had a return on equity of 26.509% in 2014 and 33.439 in 2015. This means the company earned higher return in 2015 than in 2014 from each unit of equity capital raised (O’Sullivan, 2016). Therefore, the company performed better in 2015 than in 2014.

2.3 Leverage Ratios

2.3.1 Debt ratio

Debt ratio = long term debt ÷ capital employed × 100

Year

2014

AED ’ 000

2015

AED ‘000

Total long term debt

5,959,484

6,874,794

Capital employed

35,630,574

41,921,132

Debt Equity ratio

16.726%

16.399%

A company with a high debt ratio is highly leveraged and thus it would be considered a risky investment by potential investors. Emaar had a debt ratio of 16.726% and 16.399 in year 2014 and 2015 respectively. This means that over 16% of the company capital structure comprises of debt capital. Companies with high debt capital are considered as risky investments (O’Sullivan, 2015).

2.4.1 Debt to asset ratio

=Total liabilities ÷total assets ×100

Year

2014 AED ‘000

2015 AED ‘000

Total liabilities

38,548,682

37,635,662

Total assets

74,179,256

79,556,794

Debt to asset ratio

51.967%

47.307%

The company had a debt to asset ratio of 51.967% in 2014 and 47.31 in 2015. The higher the debt to asset ratio the high the leverage level of the company. As mentioned earlier, a company that highly leveraged is considered a risky investment. The company had a high debt to asset ratio in 2014 than in 2015.

2.4.2 Debt to equity ratio

=Total liabilities ÷ equity × 100

Year

2014 AED ‘000

2015 AED ‘000

Total liabilities

38,548,682

37,635,662

Total equity

35,630,574

41,921,132

Debt to equity ratio

108.190%

89.777%

It is riskier for the company when it is depending on debt financing than equity financing. The result for Emaar properties shows that the debt to equity ratio for 2014 and 2015 was 108.190% and 89.77% (O’Sullivan, 2016). This means for 2014 Emaar depended larlgely on debts and in 2015 it used 89% from debts and 11% from equity financing.

2.5 Asset Management Ratios

2.5.1 Inventory turnover ratio

=Revenue ÷ inventory

Year

2014 AED ‘000

2015 AED ‘000

Revenue

9,930,044

13,660,536

Inventory

1,126,558

2,616,981

Inventory turnover

8.814

5.220

The results here show that Emaar sold its properties in 2014 8.814 times faster than in 2015 which were 5.220 times faster (O’Sullivan, 2016).

2.5.2 Days sales outstanding ratio

Year

2014 AED ‘000

2015 AED ‘000

Accounts receivable

(1,126,558 + 3,392,747) = 4,519,305

(2,616,981 + 4,814, 487) = 7,431,468

Revenue ÷ 360

25583.456

37,945.933

Days sales outstanding

163.841

195.84

These results show that it took Emaar more than 5.5 months in 2014 to sell off its outstanding properties, while in 2015 it took more than 6.5 months to sell off its properties (O’Sullivan, 2015).

2.5.3 Fixed assets turnover ratios

Year

2014 AED ‘000

2015 AED ‘000

Revenue

9,930,044

13,660,536

Net fixed assets

8,213,675

9,333,284

Fixed assets turnover

1.209

1.464

The results here show that the turnover for Emaar Properties assets in 2015 was 0.255higher than 2014 which means that the fixed assets were better utilized in 2015 than 2014 (O’Sullivan, 2016).

2.5.4 Total assets turnover

Year

2014 AED ‘000

2015 AED ‘000

Revenue

9,930,044

13,660,536

Total assets

74,179,256

79,556,794

Total assets turnover

0.134

0.172

The total assets turnover are usually expected to be high that the fixed assets turnover but the main reason why they are low in Emaar is that fixed asset turnover only focuses on one aspect that is the fixed assets (O’Sullivan, 2016).

3.0 Conclusion

Financial analysis is the best ways to measure a company’s performance in regards to its competitors. Most of financial ratios that are used to compute financial are primarily derived from the balance sheet. Ratios that analyze the company’s profitability are mainly derived from the income statement. Leverage ratios are also largely derived from the balance sheet. In all the ratios asset management and liquidity ratios are easy to compute and interpret. Based on the analysis above, it is clear that the company remained profitable although it largely financed it growth using the debt capital.